Tuesday, 25 August 2015

How Keynesians became part of the problem!

Back in 2000 a new footbridge over the Thames was opened, however, it had a major fault, it wobbled badly. However the reason why it wobbled was moderately interesting. Like all bridges it had a swaying motion with  a resonance frequency. However this frequency was approximately the same as most people's walking pace. Without thinking people found themselves walking in time to the sway and the result the bridge swayed more, essentially a feedback mechanism caused by an instinctive desire to walk in time with the sway.

Arguably similar psychological basis causing feedback loops can be seen through human culture. Conspiracy theories as documented in David Aaranovitch often fulfil a base need for a simpler and more rational world. However become difficult to displace once they gain a critical mass of support. Indeed often their level of support as proof of their "truth". Evidence which should make such theories fall apart are "debunked" via pseudo-experts. Similarly economic bubbles are typically caused by a similar narrative where some asset is perceived as a good investment  (e.g. Dot Com stocks). This leads to over investment which in turn drives up the price of the asset reinforcing the narrative. When the crash however comes the results for those who invested last can be devastating.

Undoing the damage of these economic bubbles was a primary motivator of Keynes. Keynes believed that simply waiting for economic growth after a bump was simply not a good enough response from economists. He famously stated "in the long term we are all dead". The role of good economics was try to prevent depressions and he felt this could be done via stimulus spending. There are good arguments for Keynesian economics. Without a feel good factor recessions can spiral into depressions (essentially a negative bubble) leading the suppressed demand which ultimately undermines economic activity. By contrast kickstarting an economy by creating demand (using tools such as low interest rates, higher inflation, devaluing a currency) can get an economy back on its feet. However whilst the economics might be sound, their politics is increasingly dreadful.

Firstly there has been their clumsy attempts to get the population on their side. Having failed (rightly or wrongly) to convince policy makers of their arguments, many top Keynesians have attempted to put their arguments directly to the public. There is nothing wrong with this in principle, however, in practice the results have been relatively mixed. Part of engaging successful is to ensure that the idea is catchy. Explaining the benefits of higher inflation verus spending cuts can get very dry, however, writing a popular economics book called "End this Depression now" (as Economics Nobel Laureate Paul Krugman did) helps overcome this problem.

However there is a fine line between simplification for understanding and deception. Sadly the title is probably all most people will read of this book. This can be seen on left wing social media circle which is full of memes along the lines of "Austerity is purely ideological say Nobel Laureate" spread by people in search of easy solutions.  Sure Paul Krugman isn't the first academic to suffer from a catchy title being misinterpreted. There are many other examples: -
- Richard Dawkins "The Selfish Gene" was commonly misinterpreted as an ode to individualism when in actual fact it was largely about the evolution of altruism.
- Similarly James Surowiecki's "Wisdom of Crowds" in reality dealt with the situations where groups of people can collectively have better judgement than individuals and was not arguing for crass populism.

.... However what marks Krugman is that having got his anti-Austerity crowd fired up he seems to have done little to disabuse their belief that complex problems have simple solutions.

Sadly Krugman is not alone. Another recent example was Stiglitz cack-handed engagement with the Greek crisis. Few, with the wisdom of hindsight, see the Greek decision to join the euro as a good one. It enabled their government to borrow unfettered at low interest rates and subsequently has tied their economy to the German one. The result has been that Greek now faces a terrible choice of more austerity via spending cuts or unpegging their currency austerity through inflation and devaluation.

There was never really any serious "other" alternative, as there was little political will in Germany to subsides the Greeks and even less in many many Eastern Europeans (with lower GDP per capita than Greece). So when the Greek government decided to have a referendum and threaten to leave to get better terms there was no much realistic chance of success. Still presumably despite having some awareness of the political backstory and the goals of the Greek government, Stiglitz managed to write a piece recommending the Greeks vote "no". Rather unsurprisingly the results were disastrous with the Greek government tanking their economy and getting worse terms from the EU.

However perhaps the greatest example of the ability of Keynesian economists to shot themselves in the foot politically is still unfolding right now. After the UK Labour party lost the general election in they commissioned some polling. This indicated that UK electorate saw them as too left wing. Rather than engaging with this realty, many labour supporters rather are indulging themselves in political fantasy on any conspiracy theorist would be proud of. As a result they have concluded that they weren't left wing enough and thrown their weight behind veteran hard left wing campaigning MP, Jeremy Corbyn.

Most political pundits, even those traditionally of the left, are questioning his wider electoral appeal on a range of issues from his "friendship" with terrorists to his hard left economics (including Polly Toynbee, Janan Ganesh, Dan Hodges). Yet this hasn't stopped some Keynesian economists writing a letter in support for him praising his Keynesian credentials. This has almost certainly helped this hard left fantasy afloat in supporters but its difficult to see how this helps the political left in the UK. Indeed given most Keynesian economists presumably want something somewhat to the left, its difficult to see this engagement as anything other than deeply counterproductive.

Keynes originally focused his efforts on fixing bubbles. He understood animal spirit and how things can get carried away with the momentum. Sadly his disciples seem to have forgotten this and instead seem to be busy creating political bubbles by adding their "expert" voices to mob on social media baying for change. Unfortunately like all bubbles they are likely to end badly.... and more often than not for the causes they claim to be supporting. 

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